Why Haven’t Loan Officers Been Told These Facts?
Try your hand at a few obscure but essential laws; the answers next week.
As adopted by most states, the Interagency Guidance on Subprime Financing (CSBS Subprime Statement) provides guidance on offering subprime loans to consumers. Which of the following typifies the practices required in the guidance?
- Lenders must provide timely disclosure of the existence of any balloon payment and the consequences attendant to the uncertainties surrounding balloon payments.
- Consumers must obtain neutral housing counseling before applying for loans with balloon features.
- Lenders must not offer loans with risky features to first-time homebuyers.
- Prepayment penalties must be optional to the consumer
Regulation Z prohibits the “steering” of a consumer to consummate a transaction because the loan officer or the business (mortgage broker) will receive greater compensation from the lender. However, if the originator can prove that the selected financing is in the consumer’s interest, directing a consumer to a lender or loan product that pays more compensation does not violate Regulation Z. Which of the following instances more likely provides evidence that the loan was in the consumer’s interest?
- The loan has a higher interest rate than other offers and pays more compensation to the originator, but with no prepayment penalty
- The loan has a higher interest rate than other offers and pays more compensation to the originator, and the lender closes loans fast
- The loan has a higher interest rate than other offers and pays more compensation to the originator, and the lender is more reliable
- The loan has a higher interest rate than other offers and pays more compensation to the originator, and offers biweekly mortgage payments
Answers Next Week
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Answers from last week’s questions
Which of the following transactions are not subject to the Truth In Lending Act?
- Owner-occupied four-unit, closed-end, cash-out second, a High-Cost loan funded by a subprime lender.
- One-unit purchase, a vacation home funded by a national mortgage company.
- Owner-occupied two-unit purchase funded by a mortgage company.
- Owner-occupied three-unit purchase, funded by a federally chartered bank.
Reg Z 12 CFR 1026.3 (Comment 3(a)-5.i) Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.
Which of the following violates Regulation B?
- The lender requires the applicant to complete the URLA before accepting an application for credit secured by a dwelling.
- The lender requires the applicant to provide financial data and documents before accepting an application for credit secured by a dwelling.
- The lender declines a loan application without checking the applicant’s credit report.
- The lender refuses to provide a copy of the appraisal because the applicant did not pay the appraisal fee, and the loan failed to close.
Reg B 12 CFR 1002.14(a)(1)A creditor shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. A creditor shall provide a copy of each such appraisal or other written valuation promptly upon completion, or three business days prior to consummation of the transaction (for closed-end credit) or account opening (for open-end credit), whichever is earlier.12 CFR 1002.14(a)(4)(4) Withdrawn, denied, or incomplete applications. The requirements set forth in paragraph (a)(1) of this section apply whether credit is extended or denied or if the application is incomplete or withdrawn.
12 CFR 1002.14 (Comment 14(a)(3)-2) Section 1002.14(a)(3) does not prohibit a creditor from imposing a reasonable fee to reimburse the creditor’s costs of the appraisal or other written valuation, so long as the fee is not increased to cover the costs of providing copies of such appraisals or other written valuations under § 1002.14(a)(1). A creditor’s cost may include an administration fee charged to the creditor by an appraisal management company as defined in 12 U.S.C. 3350(11). Section 1002.14(a)(3) does not, however, legally obligate the applicant to pay such fees.
The VA is not High on Income from Marijuana Sales
From VA
Many states have repealed state laws that once criminalized and penalized certain uses of marijuana. The laws of some states now expressly permit the distribution and use of marijuana. However, federal law classifies marijuana as a Schedule I Controlled Substance. This makes marijuana illegal in the eyes of the Federal Government, except under the limited exceptions Congress has provided through legislation. The U.S. Department of Veterans Affairs (VA) is required to follow all federal laws, including those related to marijuana.
Because marijuana remains illegal at the federal level and Congress has not provided special exceptions for Veterans hoping to use their VA home loan benefits, it may be difficult for lenders to establish the stability and reliability of Veterans’ income derived from marijuana-related industries. As such, lenders may find it problematic to rely on such income when underwriting VA-guaranteed loans.
A Veteran who receives income from state-legalized marijuana activity is not prohibited from obtaining a Certificate of Eligibility (COE), which is a certificate that confirms the Veteran is eligible to apply for a VA-guaranteed loan and shows the amount of home loan guaranty entitlement available, if any, to the Veteran.
Income from employment in industries that are not prohibited at the federal level, such as the legal hemp industry, is not problematic for underwriting purposes.
For example, income derived from the retail sale of legally compliant hemp fabric would not raise the same underwriting difficulties that income derived from the retail sale of marijuana would. A lender could therefore treat such hemp-related income like any other source of legal income when determining a Veteran’s ability to meet loan payments.
VA continues to monitor Congressional activity and federal case law on this issue. VA will update this page if the legal status of marijuana changes at the federal level.
High on the VA’s list, marijuana updates:
https://www.benefits.va.gov/homeloans/documents/docs/marijuana-derived_income_VA_loan.pdf
Tip of the Week – Don’t neglect to ask servicemembers if they have a VA predischarge claim pending or are recipients of the Purple Heart
VA Clarifies Process for Pre-Discharge Disability Claims
In some cases, the VA allows servicemembers to seek adjudication of service-related disability before discharge from active duty. Among other benefits, the disability rating may then enable the waiver of the VA Funding Fee while the party is still on active duty and thereafter.
If your servicemember customer is transitioning to civilian life, do not neglect to inquire about any pre-discharge disability claims.
Before the VA published Circular 26-22-12, VA advised lenders to seek a waiver memorandum from VA regarding the pre-discharge claim when seeking to waive the funding fee for active duty servicemembers soon to be discharged.
For servicemembers on active duty, VA regulations permit the Funding Fee waiver if the servicemember was awarded the Purple Heart. However, many servicemembers with significant service-connected disabilities are not recipients of the Purple Heart. Typically, it is not until after the servicemember is separated that the VA establishes a disability claim.
The challenge many servicemembers face when transitioning from military support structures to VA structures is a gap in benefits. For those servicemembers seeking support for life-changing disabilities connected to their service, the Department of Defense permits adjudication for service-connected disabilities pre-discharge. The adjudicated pre-discharge disability rating allows for a more seamless transition from military support to the VA program. That includes a waiver of the funding fee on VA-guaranteed home loans.
In some cases, the service-connected disability does not present until after separation. Therefore, for many servicemembers, until the VA adjudicates the degree of disability and subsequent benefits, the individual must be separated from service to qualify for the Funding Fee waiver.
Servicemembers getting an affirmative pre-discharge claim adjudication before separation should not pay a funding fee. In these cases, if the lender neglectfully collects the funding fee, generally, VA makes no refund to the borrower. That would be a significant mistake for a loan officer to make.
Circular 26-22-12
June 23, 2022
Certificate of Eligibility Funding Fee Status Update
For Active-Duty Service Members With Pending Pre-Discharge Claims
1. Purpose. The purpose of this Circular is to announce an update to the funding fee status on Certificates of Eligibility (COE) where the lender has submitted VA Form 26-8937, Verification of VA Benefits, for an active-duty Service member who indicates they have a pre- discharge disability claim pending with VA.
2. Background. VA Circular 26-21-11 advises lenders to ask borrowers if they have a pending disability claim with VA and to submit VA Form 26-8937 for active-duty Service members with a pre-discharge claim pending. If a proposed or memorandum rating is not obtained, and the loan closing takes place before the Veteran is discharged from service, the funding fee exemption does not apply, and the Service member will not be entitled to a refund.
3. Action. VA is introducing a funding fee status to inform lenders when the VA Form 26- 8937 has been received and the pre-discharge or memorandum rating request is in process. Upon receipt of VA Form 26-8937, VA will conduct research to see if the Service member has filed a pre-discharge claim.
a. If the Service member is eligible for the home loan benefit and VA records indicate the Service member does not have a pre-discharge claim pending, VA will annotate the COE record and issue the COE with a funding fee status of Non-Exempt.
b. If the Service member is eligible for the home loan benefit and VA records indicate the Service member’s pre-discharge claim has been adjudicated, VA will update the COE with the appropriate funding fee status and issue the COE.
c. If the Service member is eligible for the home loan benefit and VA records indicate the Service member has a pre-discharge claim pending that has not been adjudicated, VA will submit the rating request to the Veteran Service Center (VSC). VA will update the COE funding fee status to Non-Exempt – In Development and issue the COE. The Service member is not exempt at this time. If a proposed or memorandum rating is not obtained, and the loan closing takes place before the Veteran is discharged from service, the funding fee exemption does not apply, and the Service member will not be entitled to a refund. VA will update and reissue the COE as appropriate based on the response received from VSC.
For more information, please see the entire VA Circular 26-22-12 here:
https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_22_12.pdf
2022 CE – Sneak Preview
2022 CE has begun!
LoanOfficerSchool.com is excited to provide a sneak peek into our 2022 CE offering. The LOSJ series on subprime financing and servicing underserved markets borrows heavily from the 2022 CE 2 Hour nontraditional mortgage product market segment.
We will cover key knowledge points necessary to implement a subprime program from soup to nuts. In addition, the course covers subprime underwriting requirements, how to prove that the subprime loan is in the consumer’s best interest, best efforts requirements, steering safe harbor, residual income calculation, recognizing loan risk, and the competencies necessary to shop your loan and get your customer the best price.
Dodd-Frank and the implementation of Regulation Z have had some negative and unintended consequences for American consumers. Coupled with the Fed’s monetary policies, runaway housing costs, and the management of the GSEs, we have an ugly housing storm brewing. As a result, the growing subprime industry may be well-situated to address the needs of many consumers falling into the remnants of the 2008 housing cracks.